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Current Affairs

RBI announces relief measures

Date: 28 March 2020 Tags: Monetary Policy & RBI

Issue

With an aim to curtail the impact of the coronavirus pandemic and the subsequent 21-day lockdown, the RBI has announced a slew of economic measures.

 

Background

It may be noted that the MPC meeting, which was earlier scheduled for March 31-April 3, was advanced to March 25-27 in view of the deteriorating economic situation.

 

Details

  • The Reserve Bank of India cut its repo rate by 75 basis points (bps) to 4.4 percent. Besides this, the central bank also cut the cash reserve ratio (CRR) for the banks by 100 bps to 3 percent with effect from March 28 for the next one year.

  • The reverse repo rate has also been reduced by 90 basis points to 4 percent in a bid to maintain financial stability and revive growth.

  • RBI to undertake repo operation of up to Rs 1 lakh crore to infuse liquidity into market.

  • Cash reserve ratio of all banks reduced by 100 bps to 3 percent with effect from March 28 for 1 year; to release Rs 1.37 lakh crore liquidity.

  • RBI permits all lending institutions to allow 3-month moratorium on payment of installments on term loans. Moratorium on term loan, deferring of interest on working capital will not classify as default, not to impact credit history of borrower.

  • Interest on working capital facilities to be deferred by three months and such deferment not to be considered for NPA. This is one of the key takeaways from RBI's announcements as many people have been financially affected due to the lockdown implemented to prevent novel coronavirus from spreading in India.

  • RBI has also been conducting many other monetary operations for better liquidity management as it scrambles to keep the banking sector healthy in a bid to support the economy in the wake of the novel coronavirus pandemic.

 

Cash Reserve Ratio (CRR)

The Reserve Bank of India or RBI mandates that banks store a proportion of their deposits in the form of cash so that the same can be given to the bank’s customers if the need arises. The percentage of cash required to be kept in reserves, vis-a-vis a bank’s total deposits, is called the Cash Reserve Ratio. The cash reserve is either stored in the bank’s vault or is sent to the RBI. Banks do not get any interest on the money that is with the RBI under the CRR requirements.

 

Statutory Liquidity Ratio (SLR)

Every bank must have a specified portion of their Net Demand and Time Liabilities (NDTL) in the form of cash, gold, or other liquid assets by the day’s end. The ratio of these liquid assets to the demand and time liabilities is called the Statutory Liquidity Ratio (SLR).  An increase in the ratio constricts the ability of the bank to inject money into the economy.

 

Repo rate

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. It is a form of short-term borrowing, mainly in government securities.

 

Reverse repo rate

Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country. It is a monetary policy instrument which can be used to control the money supply in the country.